Inferential expectations

Abstract

We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Thus, rational expectations is a special case of inferential expectations if agents are unconcerned about mistakenly changing their beliefs (the test size a equals unity), or if there is so much information available about a parameter that it is known with certainty (the sampling distribution of the estimator collapses to a point). We.pr~~ent the results of an individual choice experiment showing preliminary support for inferential expectations, in comparison to either rational expectations, or adaptive expectations with one degree of freedom. Least-squares estimates for a are less than unity for over 40% or over 60% of experimental participants. The impact of inferential expectations is illustrated by showing how it alters a simple model of the exchange rate and a Lucas supply function.